Our financial results need to improve. While the fundamentals of our business remain strong, we are taking immediate actions to implement a refined corporate strategy which, coupled with improvements in our operating environment, will lift our performance moving forward.
In my first report to you as Chief Executive Officer, I would like to start by saying I feel very honoured to be given the opportunity to lead a company with such a strong heritage, iconic brands and long track record in helping customers in times of need.
However, there is no doubt the recent past has been challenging for the Group.
Increased claims costs relating to more severe and frequent natural perils, coupled with continuing difficult trading conditions in key insurance markets and widening credit spreads, have severely impacted our performance for the 2008 financial year.
While these factors have been felt across the entire Australian general insurance industry, we are not making excuses for poor performance. We have acknowledged we need to do better, and have undertaken a thorough review of all aspects of the organisation.
We are now in the process of implementing the results of the review, including a refined corporate strategy and operating model, designed to significantly improve performance.
Some time ago, IAG took a strategic decision to focus on general insurance rather than branching out into other classes of insurance or businesses. This hasn’t changed—our business remains focused on general insurance.
Our refined strategic intent is to create a portfolio of high performing, customer focused, diverse operations that provide general insurance in a manner that delivers superior experiences for stakeholders and creates value for shareholders.
Taking this portfolio management approach should enable us to deliver a more consistent performance, despite owning a group of general insurance businesses operating at different stages in both economic and insurance cycles.
We’ll be measuring our financial success based on two key targets which we aim to achieve through the cycle—to deliver top quartile total shareholder return and a return on equity greater than 1.5 times our weighted average cost of capital. This equates to a return on equity of around 15% through the cycle.
Meeting customer and employee measures across each business will be critical to our success, and at the Group level our clear focus is on sustainable profitability.
Our refined strategic priorities are to:
- improve performance in Australia and NZ, the Group’s two biggest markets;
- pursue select international growth opportunities, particularly in Asia and other specialist markets in which we operate;
- establish a devolved operating model with the businesses given end to end authority, accountability and responsibility for performance; and
- drive operational performance and execution.
We have taken immediate action to implement our refined strategy, as highlighted below.
A key priority is to refocus on our home markets of Australia and NZ.
Our largest business, Australian direct insurance—which operates under brands including NRMA Insurance, SGIO and SGIC—delivered an insurance margin of 11.1% during the year. This is an acceptable margin, but one we think we can improve further by delivering superior, differentiated customer experiences and ensuring we manage our costs.
Our intermediated insurance business in Australia, CGU, continued to face challenging, soft commercial insurance market conditions. In line with our strategy, we maintained our pricing discipline and as a result, lost some market share. We believe conditions are now starting to improve, and expect CGU’s underlying insurance margin to benefit from targeted rate increases and efficiency initiatives.
The profitability of our NZ business was adversely impacted by significant claims from natural perils, including severe storms and the largest losses from an earthquake in many years as well as continued soft commercial market conditions.
We are making significant operational changes to improve our performance across each of these businesses. In Australia, we expect to benefit from before tax annual savings of $130 million once the initiatives are fully implemented (expected to be from September 2008) and in NZ we will benefit from before tax annual savings of $16 million from the 2009 financial year.
These initiatives are designed to help us refocus on the best performing parts of our business and reduce expenses. Above all, a major focus will be to better understand our customers’ needs and provide superior customer experiences. We will improve how we segment and prioritise our customers, refine our pricing and underwriting disciplines and become more innovative in the products and services we deliver.
In the UK, our specialist underwriter, Equity Red Star, maintained its unbroken track record of profitability, but market conditions have presented significant challenges for our mass market underwriting businesses. We don’t expect these conditions to substantially improve for at least another two years.
As a result, we have decided to scale back our UK operations, and will concentrate on being a specialist motor insurance underwriter through Equity Red Star. This means we will look to sell or restructure some of our mass market underwriting and distribution businesses.
Asia remains an important market for our future growth.
Our existing businesses in Thailand and Malaysia continued to grow during the year and we maintained our focus on creating value and driving profitability through transferring core skills and capabilities.
We’ll continue to grow organically, and selectively pursue acquisitions to build on our existing presence in these markets. Our preference is to acquire small, complementary businesses rather than large investments as we consolidate our existing position.
The general insurance markets in India and China are our priority for medium term growth. In India, we announced our plans to establish a general insurance joint venture with India’s largest bank, the State Bank of India, providing us with a significant opportunity in this high growth market. We are also assessing a number of general insurance acquisition opportunities in China.
We have moved to a new operating model, creating end to end businesses aligned around customers, brands and markets. In this devolved model, accountability and responsibility are closer to the end consumer. This provides our operating businesses the control they need to execute strategies and manage performance, but within an overall Group framework.
The success of our refined strategy is imperative to the future success of IAG, however, putting the strategy into action has incurred one off costs which have affected our result for the 2008 financial year.
We incurred $350 million in impairment charges related to our plan to scale back our UK operations, and the initiatives implemented in our Australian businesses have resulted in a before tax restructuring cost of around $60 million.
When combined with the financial effects of operating in an environment characterised by continuing soft cycles in some of our key markets, another year of high claims from natural perils and volatile investment markets, these factors contributed to the Group reporting a net loss after tax for the 2008 financial year of $261 million.
Our insurance profit was $448 million, compared with $767 million the previous year, which represented an insurance margin of 6.1%, down from 11.4% last year.
The impact of widening credit spreads reduced our result by $122 million, or 1.7% on the insurance margin. Income generated from shareholders’ funds also reduced significantly to $24 million compared to $301 million last year.
In this context, the board declared a reduced final dividend of 9 cents per ordinary share (cps). This takes the full year dividend to 22.5cps, fully franked, which is a reduction of 7cps from the previous year.
As mentioned, we know we need to do better. We believe the initiatives we are taking, coupled with improvements in our operating environment, will help us improve our financial performance and deliver an insurance margin in the 2009 financial year in excess of 10%.
Regrettably, our refined corporate strategy also means we have rationalised the number of employee and executive roles across our businesses. Where possible, this has been accomplished through natural attrition and redeployment, but unfortunately there have been redundancies. This is undesirable but necessary to ensure the business can improve its performance. Throughout this process, we have followed procedures to ensure employees are treated fairly and ensure minimal impact to the teams who service our customers.
I would like to publicly acknowledge those employees leaving the Group and thank them for their contribution. In particular, I would like to pay tribute to the former members of the executive team for their outstanding service to the organisation.
I would also like to express my sincere thanks to former CEO Michael Hawker for inviting me into the organisation, and for being so generous with his time while I was learning about our organisation. On behalf of all employees I’d like to thank Mike for his leadership over the past seven years.
I am very proud of the way our employees have continued to operate professionally and with integrity in the face of the many challenges we have experienced. I’m pleased to report that the overall engagement of our employees remained level with the previous year, based on an employee survey conducted early this year, with many businesses scoring in the ‘best employer’ zone.
I don’t underestimate the amount of hard work and effort contributed by our people and I thank all employees for their ongoing commitment to our organisation. Our people are the key to positioning our business for ongoing success.
We view the changes we’re making as necessary to ensure we build a stronger organisation for our customers, employees, shareholders and other stakeholders with whom we interact, despite the short term impacts.
Our commitment to improving our performance against non financial measures remains as important as our financial performance improvements. We have integrated a summary of our non financial results into this annual review.
I’m pleased that our customer satisfaction index score for our largest business, Australian direct insurance remained high at 84, and our businesses introduced a number of sustainable insurance products for customers.
Many of our employee indicators remained stable, however we acknowledge that work and investment must continue to build a motivated, engaged and high performing culture, operating in a safe working environment.
In line with our 2012 carbon neutral commitment, we’ve made progress in reducing our CO2e emissions this year. We will continue to support initiatives that improve the energy efficiency of the buildings we occupy which benefits not only the environment, but reduces our own costs.
We are proud to have been included again in the Global 100 Most Sustainable Corporations in the World and Dow Jones Sustainability Indexes. While recognising that these benchmarks illustrate our leadership, the bar is high. We know we must continue to rise to the challenge of exploring new ways to maintain our leadership position by delivering superior outcomes for our customers, employees and shareholders.
During the 2009 financial year, subject to the caveats mentioned earlier, we expect our underlying GWP to grow 3%–5%. Reported GWP is expected to grow around 0%–2% due to our strategic decision to scale back our operations in the UK, and the expected effect of the introduction in New South Wales (NSW) of six month compulsory third party (CTP) policies (otherwise known as ‘green slips’).
We expect our insurance margin to be above 10%. This margin now includes corporate expenses and the NSW insurance protection tax, which were previously reported separately and equal to about 1% of the reported margin.
I firmly believe the fundamentals of our business remain strong and I’m confident that our refined corporate strategy, coupled with improvements in our operating environment, will improve shareholder value.
Michael Wilkins
Managing Director and
Chief Executive Officer
